Swiss offer tough Brexit lessons for Britain's banks

Reuters

By Joshua Franklin

Photo:

By Joshua Franklin

ZURICH (Reuters) - As Britain's banks make their case for retaining unrestricted access to the single European market after Brexit, the efforts of their Swiss counterparts offer little cause for optimism.

Non-EU member Switzerland's banking sector has been battling for more than half a decade to win full access to the EU market. Yet squabbles over immigration at home and political obstacles in Brussels have hindered progress.

"This is not something that's going to happen in the next five years," said Jan Langlo, managing director of the Association of Swiss Private Banks (ASPB).

The Swiss finance minister even suggested last month that a deal on financial services might be impossible.

The travails of Switzerland exemplify the tough and frustrating battle that could be ahead for Britain to prolong banks' ability to serve the entire EU from London - commonly referred to as passporting rights - after Brexit.

And, while there are fundamental differences between the two countries' financial sectors, the workarounds Swiss banks have used to mitigate their lack of pan-European access offer a guide to the options Britain's lenders could explore.

Instead of waiting for a political breakthrough, Swiss banks requiring single market access, including UBS <UBSG.S>, Credit Suisse <CSGN.S> and Julius Baer <BAER.S>, have set up subsidiaries in Frankfurt and Luxembourg in the EU, incurring extra costs and regulation.

This has come at a cost to the Swiss financial center, with banks moving thousands of jobs out of Switzerland. The ASPB has warned an increasing number of positions will be filled abroad without simplified EU access.

The current set-up of having to set up subsidiaries is not ideal but banks recognize it is the best they can hope for right now, said Marc Raggenbass, a regulatory, compliance and legal partner at Deloitte in Switzerland.

"They are not 100 percent happy but they live with it."

At the same time, officials are seeking to strike deals with individual European countries to allow Swiss banks to sell their services there, and negotiating "equivalence" for Swiss financial rules in the EU to allow lenders limited market access in some business areas.

JOBS MOVE OUT

Switzerland uses more than 100 bilateral agreements with Brussels to give various industries unrestricted access to the single market and in return it adheres to core EU principles including the free movement of people.

But financial services are not among the web of Swiss-EU accords as, for years, Switzerland's banks viewed deeper EU ties with suspicion, fearing they could jeopardize secrecy rules which helped the country become a global tax haven.

The landscape changed markedly after the financial crisis, however, when a global clamp-down on tax evasion eroded Swiss banks' revenue and led to them seeking better access to the EU single market and the business opportunities there.

Lack of such access has contributed to banking jobs moving abroad with the number of employees at banks in Switzerland falling 22 percent since 2009, according to the Swiss Bankers' Association (SBA).

In the first half of 2016, the number of employees in the sector in Switzerland fell by 3,454, an SBA survey found. By contrast Swiss banks hired a net total of over 6,700 people abroad.

Britain could be hit harder than Switzerland by a lack of single market access. The UK is a global powerhouse of investment banking, for which passporting is more important than in private banking, in which Swiss banks traditionally specialize.

IMMIGRATION DILEMMA

But if the Swiss experience is anything to go by, British banks should focus less on talks between London and Brussels, and more on office space in Frankfurt and Luxembourg.

Switzerland has been trying for years to reach a deal with the EU on financial services like those covering other sectors, but the premise has become deeply problematic since the country voted to limit immigration from the EU in a 2014 referendum.

This would contravene the existing accords, which are contingent on Switzerland allowing free movement of people from the bloc.

It is still unclear how the government will be able to respect the referendum result while preserving the pacts.

Britain is likely to face a similar dilemma if it seeks single market access for its banks, given voters' decision to leave the European Union was driven in part by a desire to curb immigration.

The British government has signaled that limiting immigration will take precedence over single market access in the Brexit negotiations to come, which has dismayed UK-based banks.

As Switzerland's talks with the EU on a financial services deal have stalled, its focus has turned to other options.

It is looking to reach agreements with individual countries - it already has accords of varying scope with Germany, Britain and Austria - while negotiating with the Brussels for "equivalence", a recognition that certain Swiss financial rules are comparable in strength to the corresponding EU laws.

Even in these areas, progress looks set to be slow.

The ASPB's Langlo hopes for agreements with "a few select European countries" in the next two years, while the equivalence process is "a useful and valuable concept" but lacks transparency and reliability, according to Stefan Hoffmann, the SBA's head of European affairs.

"Our own experience is that it is always possible (for a country outside the EU) to find and arrange some useful solutions," Hoffmann told a British parliamentary committee on EU financial affairs last month.

But he added: "It is probably less easy than being a member of the EU."